What is Technical Analysis ?

Technical Analysis is basically the study of Price Chart, undertaken to get an idea about future price action of any traded stock. A Price Chart plots the quotes of a stock traded on a stock market. All past\present\future news relating to a stock, together with investors' opinion about it, determine the price of the stock on the trading floor. The "Price" discounts everything. Therefore, study of anything else is unnecessary. Technical Anlysis comprise of various techniques to study such price action over a period, as shown in the price chart.

How is it different form Fundamental Analysis?

Fundamentalists study the cause, while technicians study the effect. "Price" is the final result of all forces that can affect a stock. Price even discount the future, unknown news, while Fundamentals reflect the past. It is because of this reality, we often see tops being made on good news and bottoms being made on bad news.

Technical Analysis Help

The Technical Analysis applet allows you to view intraday and end of the day chart and perform advanced analytics by allowing you to plot various inidicators and studies. The applet is extremely powerful and versatile giving you a wide range of indicators and studies and also control on the visual display of the plots and has advanced features like dragging and dropping securities and indicators one on top of another and across windows. The various options and features are explained below. Menu Bar Options: Clicking on this gives you a menu for: Adding Indicators Plotting Studies Setting Chart Type Adding Securities for compartive study Help

Status bar: The status bar is cursor sensitive and tracks cursor movement to display data relevant to pertaining data point on the X axis. It has information such as name of the Active Security, Date, Open High, Low, Close, Volume.

Adding Indicators This allows you to add indicators for studying price movements. Clicking on this gives you a popup dialogue box. You can scroll through this list and select the Indicator you wish to plot. Advanced Tips: Not all indicators are available with Intraday Charts as they require "Open, High, Low, Close as parameters]. Some indicators are plotted in a new window. A new window is formed when the current window is split horizontally. The grey line that separates this spilt can be dragged to resize the window. Indicators and graphs, after selection, can be dragged and dropped from one window to another. To delete a window right click anywhere within the window and select Delete Window from the menu.

Adding New Securities This allows you to plot another security for comparitive study. It gives you a search dialogue that you can use to locate the security to wish to plot. The security is added with the default colors and in OHLC format. When you select a ticker and click on "OK' the title bar displays "Please Wait ...Loading Security" The applet is loading data from the server for compartive plotting, so kindly wait for the data to load. Once the Chart is plotted you can select the graph [the data points have small squares that indicate it is selected] and perform a right click for further options. These options include - Properties This allows you to change the plot colors. Choose the up-color and down-color you wish to plot and click on "OK" - Delete Graph Selecting this will delete the currently plotted Graph. - Delete Window This option is meant for deleting windows that will be created when you add certain Indicators. This does not allow you to delete the main graph window. performing a delete window in the defalt window will delete the additional securities

Plotting Studies This allows you to plot various studies. By selection the particular study it changes the cursor mode to draw your study. If you wish to take your cursor back to normal [if you don't want to draw a line after selecting trendline, for example] then from Studies Menu Options select Pointer. This is the default pointer in selection mode.The various studies that can be plotted are as below. TrendLine Horizontal Line Vertical Line Parallel Pointer Fan Arcs Fan Lines Cycle Lines Retracement Line Text You can select studies drawn in "Pointer Mode" and redraw / modify them. When a Study is selected it has "boxes" or handles that indicate that the study is in selection mode. Click and drag at these handles to modify the study. To delete a Study select it and press the delete key.

Setting Chart Type For End of the day charts the following chart types can be set. OHLC [Open High Low Close] Candle Stick Line

Mountain The chart can be plotted as any of the above. These plot are in two colors, an up color and a down color. When a tick is higher than the previous tick, it is plotted with the upcolor else it is plotted with the down color. Note: For Intraday Chart the only option available will be line charts, as other Plot Types require Open, High, Low and Close which is not relevant to intraday charting.

Visual Controls The Visual Controls of this applet are mainly Zoom and Pan. At the bottom of the Display area is a scroll bar that controls the panning of chart and to the bottom right corner are the zoom controls. These are explained below Pan When the chart displays all the datapoints the scroll bar is disabled. But as you zoom into a particuar period of the chart, the scroll comes into play. It allows you to pan, or move across the X axis / time-period and pan the chart. Advanced Tip: During Intraday plotting, the data is auto-refreshed. So if you have zoomed into the chart, then you may want to reset the chart zoom periodically to visualize all the data points. Zoom [Step in-out, Window, Reset] Zooming allows to enlarge a section of the chart to do this there are for you buttons in the bottom right corner labeled as +, -, Z & R. Step in-out:By pressing the + or the - button you can zoom in or out in step by step mode. which is in moderate increments that u may require for fine tuning your zoom state. Zoom Window: By pressing the Z button your cursor will turn in zoom mode. You can click any point on the screen and keeping it pressed drag it to define a rectangle which will define your zoom area. Reset:This will simply zoom out to the maximum allowing you to view the entire chart. Shortcut Keys For power users short keys are a must. The following shortcuts will enhance the effieciency of such users. For those new to charting all options are available thorugh the menu too. Keys Action Changes B Changes the style of chart to Bar Chart L Changes the style of chart to Line Chart J Changes the style of chart to Japanese Candle stick Right Arrow Moves the Cursor towards RIGHT. Move the Cursor to the Right. If a trend-line is selected, this will extend the trend-line towards right. Left Arrow Moves the Cursor towards LEFT. Move the Cursor to the Left. If a trend-line is selected, this will extend the trend-line towards right.

+ Delete CTRL-Z Z I P T X C H V A F R S

Display more data in the chart

Display lesser data in the chart Deletes the Selected Study To zoom into an area of the chart. Maximizes an inner window and also restores to original size Support Vertical Line Parallel Line Trend line Cross Hair Cycle line Horizontal line Vertical line Fibonacci Arcs Fibonacci Fans Fibonacci Retracement Support line

After drawing a Trend line, P can be used to draw a parallel line

Price Style
A price chart is a sequence of prices plotted over a specific time frame. In statistical terms, charts are referred to as time series plots. On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis with the most recent plot being the furthest right. Technical analysts use charts to analyze a wide array of securities and forecast future price movements. The word "securities" refers to any tradable financial instrument or quantifiable index such as stocks, bonds, commodities, futures or market indices. Any security with price data over a period of time can be used to form a chart for analysis. While technical analysts use charts almost exclusively, the use of charts is not limited to just technical analysis. Because charts provide an easy-to-read graphical representation of a security's price movement over a specific period of time, they can also be of great benefit to fundamental analysts. A graphical historical record makes it easy to spot the effect of key events on a security's price, its performance over a period of time and whether it's trading near its highs, near its lows, or in between. While there are many ways of plotting charts, most commonly used are Candlestick chart and Line chart.

Candlestick
Originating in Japan over 300 years ago, candlestick charts have become quite popular in recent years. For plotting a candlestick chart, the four key price inputs are required which are open, high, low and close for the specific time frame. E.g. a daily candlestick is based on the open price, the intraday high and low, and the close.

Candlestick charts are easy to read, especially the relationship between the open and the close. White (or green) candlesticks form when the close is higher than the open and black (or red) candlesticks form when the close is lower than the open. The white and black portion formed from the open and close is called the body of the candle (white body or black body). The lines above and below are called shadows and represent the high and low of particular session.

Line Line Charts are created by plotting the closing prices of the specific time frame and then joining them to form a line. Some chartists consider the closing level to be more important than the open, high or low. By paying attention to only the close, intraday swings can be ignored. Line charts are also used when open, high and low data points are not available. Sometimes only closing data are available for certain indices, thinly traded stocks and intraday prices.

Head & Shoulders The Head-and-Shoulders price pattern is the most reliable and well-known chart pattern. It gets its name from the resemblance of a head with two shoulders on either side. The reason this reversal pattern is so common is due to the manner in which trends typically reverse. A up-trend is formed as prices make higher-highs and higher-lows in a stair-step fashion. The trend is broken when this upward climb ends. As you can see in the illustration (Intel, INTC), the "left shoulder" and the "head" are the last two higher-highs. The right shoulder is created as the bulls try to push prices higher, but are unable to do so. This signifies the end of the up-trend. Confirmation of a new down-trend occurs when the "neckline" is penetrated. During a healthy up-trend, volume should increase during each rally. A sign that the trend is weakening occurs when the volume accompanying rallies is less than the volume accompanying the preceding rally. In a typical Head-and-Shoulders pattern, volume decreases on the head and is especially light on the right shoulder. Following the penetration of the neckline, it is very common for prices to return to the neckline in a last effort to continue the up-trend. If prices are then unable to rise above the neckline, they usually decline rapidly on increased volume. An inverse (or upside-down) Head-and-Shoulders pattern often coincides with market bottoms. As with a normal Head-and-Shoulders pattern, volume usually decreases as the pattern is formed and then increases as prices rise above the neckline.

Double Top A double top occurs when prices rise to a resistance level on significant volume, retreat, and subsequently return to the resistance level on decreased volume. Prices then decline marking the beginning of a new down-trend.

Double Bottom A double bottom has the same characteristics as a double top except it is upside-down displays a potential upside.

Rounding Tops and Bottoms Rounding tops occur as expectations gradually shift from bullish to bearish. The gradual, yet steady shift forms a rounded top. Rounding bottoms occur as expectations gradually shift from bearish to bullish. Volume during both rounding tops and rounding bottoms often mirrors the bowl-like shape of prices during a rounding bottom. Volume, which was high during the previous trend, decreases as expectations shift and traders become indecisive. Volume then increases as the new trend is established.

Triangles
A triangle occurs as the range between peaks and troughs narrows. Triangles typically occur as prices encounter a support or resistance level which constricts the prices. A "symmetrical triangle" occurs when prices are making both lower-highs and higher-lows.

An "ascending triangle" occurs when there are higher-lows (as with a symmetrical triangle), but the highs are occurring at the same price level due to resistance. The odds favor an upside breakout from an ascending triangle.

A "descending triangle" occurs when there are lower-highs (as with a symmetrical triangle), but the lows are occurring at the same price level due to support. The odds favor a downside breakout from a descending triangle.

Just as pressure increases when water is forced through a narrow opening, the "pressure" of prices increases as the triangle pattern forms. Prices will usually breakout rapidly from a triangle. Breakouts are confirmed when they are accompanied by an increase in volume. The most reliable breakouts occur somewhere between half and three-quarters of the distance between the beginning and end (apex) of the triangle. There are seldom many clues as to the direction prices will break out of a symmetrical triangle. If prices move all the way through the triangle to the apex, a breakout is unlikely.

Trendlines
In the preceding section, we saw how support and resistance levels can be penetrated by a change in investor expectations (which results in shifts of the supply/demand lines). This type of a change is often abrupt and "news based." In this section, we'll review "trends." A trend represents a consistent change in prices (i.e., a change in investor expectations). Trends differ from support/resistance levels in that trends represent change, whereas support/resistance levels represent barriers to change. As shown in the following chart, a rising trend is defined by successively higher low-prices. A rising trend can be thought of as a rising support level--the bulls are in control and are pushing prices higher.

As shown in the next chart, a falling trend is defined by successively lower high-prices. A falling trend can be thought of as a falling resistance level--the bears are in control and are pushing prices lower.

Support and Resistance

The foundation of most technical analysis tools is rooted in the concept of supply and demand. There is nothing mysterious about support and resistance--it is classic supply and demand. Remembering "Econ 101" class, supply/demand lines show what the supply and demand will be at a given price. Resistance is equivalent to a "supply" line. When prices increase, the quantity of sellers also increases as more investors are willing to sell at these higher prices. When too much selling occurs, however, prices retreat. When this happens repeatedly near a specific price level, resistance forms at that price level. Support is equivalent to a "demand" line. When prices decrease, the quantity of buyers increases as more investors are willing to buy at lower prices. When too much buying occurs, however, prices rise. When this happens repeatedly near a specific price level, support forms at that price level. Following the penetration of a support/resistance level, it is common for traders to question the new price levels. For example, after a breakout above a resistance level, buyers and sellers may both question the validity of the new price and may decide to sell. This creates a phenomena referred to as "traders' remorse" where prices return to a support/resistance level following a price breakout. The price action following this remorseful period is crucial. One of two things can happen. Either the consensus of expectations will be that the new price is not warranted and prices will move back to their previous level; or investors will accept the new price and prices will continue to move in the direction of the penetration. When a resistance level is successfully penetrated, that level becomes a support level. Similarly, when a support level is successfully penetrated, that level becomes a resistance level.

Accumulation/Distribution
The Accumulation/Distribution is a momentum indicator that associates changes in price and volume. The indicator is based on the premise that the more volume that accompanies a price move, the more significant the price move. Interpretation The Accumulation/Distribution is really a variation of the more popular On Balance Volume indicator. Both of these indicators attempt to confirm changes in prices by comparing the volume associated with prices. When the Accumulation/Distribution moves up, it shows that the security is being accumulated as most of the volume is associated with upward price movement. When the indicator moves down, it shows that the security is being distributed as most of the volume is associated with downward price movement. Divergences between the Accumulation/Distribution and the security's price imply a change is imminent. When a divergence does occur, prices usually change to confirm the Accumulation/Distribution. For example, if the indicator is moving up and the security's price is going down, prices will probably reverse.

Bollinger Bands
Bollinger Bands are similar to moving average envelopes. The difference between Bollinger Bands and envelopes is envelopes are plotted at a fixed percentage above and below a moving average, whereas Bollinger Bands are plotted at standard deviation levels above and below a moving average. Since standard deviation is a measure of volatility, the bands are self-adjusting: widening during volatile markets and contracting during calmer periods. Bollinger Bands were created by John Bollinger. Interpretation Bollinger Bands are usually displayed on top of security prices, but they can be displayed on an indicator. These comments refer to bands displayed on prices. As with moving average envelopes, the basic interpretation of Bollinger Bands is that prices tend to stay within the upper- and lower-band. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of the prices. During periods of extreme price changes (i.e., high volatility), the bands widen to become more forgiving. During periods of stagnant pricing (i.e., low volatility), the bands narrow to contain prices. Mr. Bollinger notes the following characteristics of Bollinger Bands. Sharp price changes tend to occur after the bands tighten, as volatility lessens. When prices move outside the bands, a continuation of the current trend is implied. Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend.

A move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets.

MACD

The MACD ("Moving Average Convergence/Divergence") is a trend following momentum indicator that shows the relationship between two moving averages of prices. The MACD was developed by Gerald Appel, publisher of Systems and Forecasts. The MACD is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average, called the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities. (Appel specifies exponential moving averages as percentages as explained on page 170. Thus, he refers to these three moving averages as 7.5%, 15%, and 20% respectively.) Interpretation The MACD proves most effective in wide-swinging trading markets. There are three popular ways to use the MACD: crossovers, overbought/oversold, and divergences. Crossovers The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero. Overbought/Oversold Conditions. The MACD is also useful as an overbought/oversold indicator. When the shorter moving average pulls away dramatically from the longer moving average (i.e., the MACD rises), it is likely that the security price is overextending and will soon return to more realistic levels. MACD overbought and oversold conditions exist vary from security to security. Divergences. A indication that an end to the current trend may be near occurs when the MACD diverges from the security (page 32). A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.

Oscillators
An oscillator is an indicator that fluctuates above and below a centerline or between set levels as its value changes over time. Oscillators can remain at extreme levels (overbought or oversold) for extended periods, but they cannot trend for a sustained period. Relative Strength Index (RSI) RSI: The Relative Strength Index is a price-following oscillator that ranges between 0 and 100. A popular method of analyzing the Relative Strength Index is to look for a divergence in which the security is making a new high, but the Relative Strength Index is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the Relative Strength Index then turns down and falls below its most recent trough, it is said to have completed a "failure swing." The failure swing is considered a confirmation of the impending reversal. Tops and Bottoms: The Relative Strength Index usually tops above 70 and bottoms below 30. It usually forms these tops and bottoms before the underlying price chart. Chart Formations: The Relative Strength Index often forms chart patterns such as head and shoulders or triangles that may or may not be visible on the price chart. Failure Swings: (also known as support or resistance penetrations or breakouts). This is where the Relative Strength Index surpasses a previous high (peak) or falls below a recent low (trough). Support and Resistance: The Relative Strength Index shows, sometimes more clearly than price themselves, levels of support and resistance. Divergences: As discussed above, divergences occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the Relative Strength Index. Prices usually correct and move in the direction of the Relative Strength Index.

Rate of Change (ROC)

The Price Rate-of-Change ("ROC") indicator displays the difference between the current price and the price x-time periods ago. The difference can be displayed in either points or as a percentage. The Momentum indicator displays the same information, but expresses it as a ratio. Interpretation It is a well recognized phenomenon that security prices surge ahead and retract in a cyclical wave-like motion. This cyclical action is the result of the changing expectations as bulls and bears struggle to control prices. The ROC displays the wave-like motion in an oscillator format by measuring the amount that prices have changed over a given time period. As prices increase, the ROC rises; as prices fall, the ROC falls. The greater the change in prices, the greater the change in the ROC. The 12-day ROC is an excellent short- to intermediate-term overbought/oversold indicator. The higher the ROC, the more overbought the security; the lower the ROC, the more likely a rally. However, as with all overbought/oversold indicators, it is prudent to wait for the market to begin to correct (i.e., turn up or down) before placing your trade. A market that appears overbought may remain overbought for some time. In fact, extremely overbought/oversold readings usually imply a continuation of the current trend. The 12-day ROC tends to be very cyclical, oscillating back and forth in a fairly regular cycle. Often, price changes can be anticipated by studying the previous cycles of the ROC and relating the previous cycles to the current market.

Overview
The Japanese began using technical analysis to trade rice in the 17th century. As per Steve Nison, candlestick charting first appeared sometime after 1850. Although evolution of Candlestick charting which we use today can be attributed to the inputs of several chartists over the generations, much of the credit for developing analysis based on psychological aspect of the market may be attributed to a legendary Japanese rice trader named Homma from the town of Sakata. Candle charts can be used throughout the trading spectrum, from intraday, to daily, and weekly charting.

Interpretation
Compared to traditional charting, candlestick charts are more visually appealing and easier to interpret. Each candlestick provides an easy-to-decipher picture of price action. Immediately a trader can check the relationship between the open and close as well as the high and low. The relationship between the open and close is considered vital information and forms the essence of candlesticks. White (or green) bodied candles, where the close is greater than the open, indicate buying pressure. Black (or red) bodied candles, where the close is lower than the open, indicate selling pressure. The series of such candles on the chart help us in identifying the trend in existence. Further, some of the Candlestick patterns help us in identifying the potential reversal of trend. Highs and lows of such reversal patterns indicate support and / or resistance levels for future price action.